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Jefferies Questions PetroChina's Financial Disclosure

NEW YORK (TheStreet) -- PetroChina, the largest oil company in China, cannot explain billions of dollars in revenue shortfalls and losses, according to a Thursday report by Jefferies.

Jefferies, in a scathing research note, said they waded through a "jungle" of PetroChina's accounting disclosures "machete in hand" and emerged with fundamental questions about the transparency of the oil driller's financial statements and specifically its annual 20F filing with the Securities and Exchange Commission.

A team of analysts led by Laban Yu and Jack Yu said they could not explain why PetroChina is falling billions of dollars short on revenue the company derives from its reported energy production volumes and pricing.

PetroChina's upstream revenues declined in 2012 despite increasing volumes, flat oil and higher gas prices, according its financial disclosures, Jefferies said. The firm calculated that PetroChina had a revenue shortfall of about $10 billion in 2012 and pointed to unexplained losses within PetroChina's exploration and production operations.

Non-upstream businesses within PetroChina's E&P segment have consistently and inexplicably lost money, according to Jefferies. The analysts calculated $4 billion and $7 billion in opaque E&P segment losses, and characterized such businesses in quotation marks. "These "businesses" have always lost money... Why do they always lose money?," the anlaysts wrote.

The firm's analysis comes just as PetroChina has been entangled in a widening graft probe that has chipped away the oil giant's market capitalization. In August, PetroChina removed four of its managers amid a widening probe. According to a Sept., 2 report from the official Xinhua News Agency, former PetroChina Chairman Jiang Jiemin was been removed from his post as head of the state assets regulator and was also under investigation.

Concern over PetroChina's accounting appears to be tied to authorities' graft probe.

"What we have unearthed, we believe, is not a 'house of cards' with fraudulent profits; quite the opposite, we believe PetroChina has superb assets which, unsurprisingly, has attracted many unhelpful 'constituents.' Corruption investigations sweep away 'house of cards' enterprises, but strengthen companies whose quality assets are beleaguered by graft," the Jefferies analysts wrote.

Still, the analysts caution short sellers who are "itching to go at PetroChina as corruption investigations expose the company to years of headline risk." They say PetroChina is not another Enron, referencing the defunct Houston-based energy trader that failed amid the largest accounting fraud in U.S. history.

PetroChina "has superb assets which have, unfortunately, sprung all kinds of leaks," the analysts concluded. If those leaks can be plugged, PetroChina's shareholders could benefit.

In spite of Jefferies critical research note, they rate shares in the oil driller a "buy."